Altria preparing for breakup

Kraft Foods Inc., which was acquired 16 years ago in a hostile takeover by cigarette giant Philip Morris Cos., soon may be an independent company again.

The chief executive of Altria Group Inc., as the combined companies are now known, said Thursday that the consumer products behemoth has begun preparing itself for a possible split into two or three separate companies as early as the middle of 2005.

"Although the precise timing and chronology of events remain uncertain, I can assure you that we are working ... in anticipation of a potential breakup," Louis C. Camilleri, chairman and chief executive of Altria, told investors at a Morgan Stanley conference in New York.

Camilleri said the company's "tobacco businesses are significantly undervalued" when compared with its competitors.

Such a breakup also would get a nagging monkey off Kraft's back. Though Altria spun off 15 percent of Kraft two years ago, analysts believe the Northfield-based food giant remains undervalued in part because of its relationship with Altria, which faces billions of dollars worth of tobacco-related lawsuits.

Fears that Kraft could be on the hook in the event of a huge judgment in one or more of the cases have dogged the company's stock, analysts say.

"People have not been willing to buy in to Kraft because of the potential legal liabilities," said Mark Hugh Sam, a stock analyst with Chicago-based Morningstar Inc.

Following Camilleri's remarks, shares of Altria rose more than 8 percent, to close at $54.23 on the New York Stock Exchange. Shares of Kraft, however, rose only a little more than 3 percent, to close at $34.52, on the news.

That's a far cry from what many analysts believe Altria's value is if it were split up.

Goldman Sachs analyst Judy Hong, in a note to investors, wrote that Altria shares would be worth $75 to $80 if it were split into Kraft, Philip Morris USA and Philip Morris International.

Camilleri said Altria's "overriding objective is to deliver superior returns to our shareholders, and, towards that end, we are working to resolve the litigation issues at [Philip Morris USA] and beginning the necessary preparations for a potential breakup once the litigation environment permits."

He did not provide details about how the breakup might occur.

A spokeswoman for Kraft declined to comment on Camilleri's remarks.

At the time Philip Morris acquired Kraft in 1988, the $13.1 billion purchase was the largest non-oil merger in U.S. history. It was surpassed the next year by the buyout of RJR Nabisco Inc. by Kohlberg, Kravis & Roberts, a New York investment house.

It's not the first time that Camilleri has discussed splitting up Altria. Last year, referring to 2003 as a "watershed" year in tobacco litigation, he raised the notion that a breakup was possible. But this was the first time he gave investors some idea about when the breakup might occur.

However, the key to the breakup, he said, remains a victory in the litigation against Philip Morris in Illinois and Florida and in a Department of Justice case in Washington.

The Illinois Supreme Court is slated to hear arguments Wednesday on a $10.1 billion verdict last year that concluded the company misled smokers by suggesting that "light" cigarettes delivered less tar and nicotine than regular cigarettes.

In the Florida case, the state Supreme Court is reconsidering a decision that threw out a record $145 billion verdict against Philip Morris USA and other U.S. tobacco companies on behalf of 700,000 Florida smokers. A state appellate court ruled that the cases had to be tried individually.

Meanwhile, the Justice Department, in a racketeering trial that began in September, is seeking a record $280 billion from the tobacco industry. The government accuses tobacco companies of working together for decades to mislead the public about the dangers of smoking.

"Our best guess is we hope to have a decision on all three by next summer," Camilleri said. "Regretfully, justice is very slow in this country."

Splitting into two or three companies could be a risky decision, said Morningstar's Sam, noting the U.S. tobacco market is not growing as rapidly as the international market.

Last year, operating income of the U.S. and international operations was about $5 billion each. This year, however, Philip Morris USA is expected to record about $4 billion in operating income, while operating income for Philip Morris International is expected to be $6.5 billion to $7 billion.

Camilleri said the company would carefully weigh its decision to break apart.

"We will go to the board when we feel very comfortable that we will prevail upon any challenge, and, believe me, there will be challenges," he said.

Ben Eine, a graffiti-vandal-turned-popular-street-artist, stood at the foot of a massive stone wall Monday evening, smoking a cigarette with paint-covered hands. He was in a parking lot at Wabash Avenue and Harrison Street, where the "L" tracks bend snake-like as the Orange Line rattles in and...